Pilot Hill Advisors was retained by a consulting firm to assist in structuring and raising capital for a second ESOP transaction, where the ESOP was to purchase the remaining outstanding stock and become the 100% owner.  The direct shareholder who owned the 60% equity block to be purchased was inactive and interested in selling his remaining stake to the ESOP.  While there were a variety of structures to accomplish this objective, the primary challenge in completing the sale revolved around financing.  The company had favorable cash flow but the service-nature of its business not surprisingly resulted in a balance sheet that lacked traditional bank collateral.  Hence, the lack of collateral dissuaded banks from lending unless there was an external guaranty to support the loan. 

The usual candidates for a guaranty were not available.  The selling shareholder was unwilling to provide a guaranty and the management team lacked sufficient net worth needed to make the bank comfortable.  While the conventional sources of guaranties seemed unavailable, Pilot Hill Advisors introduced the company to a specialty lender that works with the federal government’s Small Business Administration (“SBA”).

The SBA provides a unique financing program for leveraged ESOP stock purchases whereby the SBA guaranties a portion of the loan transaction, thereby providing the bank with the credit support it requires.  As one might expect, this government program involves a gauntlet of documentation and special requirements in the structure of the ESOP transaction.  Pilot Hill Advisors assisted by successfully navigating through these requirements and the government bureaucracy to secure an SBA guaranty that induced the bank to fund the ESOP loan. 

Pilot Hill Advisors was pleased to introduce the company to the SBA financing alternative and to help it execute the financing and the ultimate ESOP transaction. 

SBA financing can be an excellent strategy for ESOP financing in the right circumstances.  To find out more, contact Jim Higgins at (908) 897-0826 or jhiggins@pilothilladvisors.com.

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